As everyone can see, the stock markets around the world have exploded higher. It really does not matter if you look at the London FTSE 100, German DAX, Shanghai Index, Nikkei 225 Index, Dow Jones Industrial Average, or even the Athens Stock Exchange (ASE), they are all surging higher. What is the one factor that all of these economies have in common? It is simply money printing. All of the central banks that control the currencies of these nations are printing money like never before.
The Federal Reserve made this popular many years ago, however, they took money printing to new all-time levels since the credit crisis began in 2007. Since that time, the Bank of London, People's Bank of China, Bank of Japan, Swiss National Bank, European Central Bank, and others have continued to inflate their equity markets by implementing easy money policies (essentially money printing). Can central bankers simply print money forever? The answer to this question is no, but at this time it seems that they will continue to print money into the foreseeable future.
Obviously, we all know that there is a price to pay when a currency is artificially deflated. The usual and most common effect will be inflation. Inflation will help to lift the value of asset prices, so many investors may think that is good. The downside is that it will make the price of goods that people need to survive more expensive. Food, oil, gasoline, heating oil, jet fuel, and other energy products will increase. Commodities such as copper, iron ore, and building materials will also inflate in price making products more expensive for everyone.
The other negative that will occur when there is this much monetary easing taking place around the world is another global stock bubble. Generally, the bigger the bubble is when it is being created the bigger the decline will be when the bubble pops. For example, just look at the bubble that was created in the late 1980's in Japan. In January 1990, the Nikkei 225 Index traded as high as 39,922.00. Today, the Nikkei 225 Index trades around the 11,100.00 level. It is safe to say that the Japanese markets have faced deflationary pressures for over 20 years. Now, the Japanese are trying to inflate their stock markets on a daily basis. They are doing this to try and boost their exports as goods become cheaper outside of their own country. Almost every country on the Earth that has a central bank is trying that same method right now. In the short term, it will boost the markets, but in the long term there will always be a price to pay. Unfortunately, the price could be a long twenty plus year sluggish economy.
Another negative for all of this money printing could just be a lack of faith in a nation's currency. Once that happens hyper-inflation can occur and that is when goods and products will explode higher in price. According to Wikipedia, hyperinflation occurs when a country experiences very high, accelerating, and perceptibly "unstoppable" rates of inflation. Many countries have experienced this in the past. Some notable countries that have experienced hyper-inflation are Germany, Argentina, and recently Zimbabwe. It is not fun when you need a month's worth of wages to buy a loaf of bread.
The United States is the world's reserve currency. This means if you are Japan, China, Russia, or any other country that does not use U.S. Dollars for trade you will need to convert that capital into U.S. Dollars in order to buy oil, gold, copper, wheat, or any other commodity. If other nations ever lose faith in the U.S. Dollar there could be serious problems around the world. Already, there are countries such as China and Brazil initiating trade deals with each other, so there could always be a problem brewing in the future.
Gold and precious metals have exploded higher over the past thirteen years. In 1999, gold was trading around the $250.00 level. Today, gold trades around the $1600.00 level after reaching a high of $1923.70 an ounce on September 6, 2011. What is gold telling us? Gold is telling us that many smart people are losing faith in fiat currencies such as the U.S. Dollar and all other printed money. You see, you cannot print gold, it must be taken from the earth and it is very difficult to get. Recently, Germany has asked for some of its gold deposits back from the New York Federal Reserve. Could this be a sign of things to come? Perhaps, but in the meantime the central bankers are printing a lot of money.
Post by: Nick Santiago